Moody’s: Turkish banks’ high reliance on foreign-currency funding likely to constrain credit growth
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London: Turkish banks may slow their lending growth in 2015-16, as foreign currency funding will likely become more expensive, says Moody’s Investors Service in a report published today.

Moody’s report, entitled “High dependence on Foreign funding is a Significant risk for Credit growth,” is available on Moody’s subscribers can access this report via the link provided at the end of this press release. The rating agency’s report is an update to the markets and does not constitute a rating action.

“Turkish banks’ rapid rise in lending over the past five years has been largely funded by foreign currency funding inflows, as domestic deposits have not kept in step with credit growth,” says Irakli Pipia, a VP-Senior Credit Officer at Moody’s. “However, reduced foreign investor sentiment is making banks’ access to funding harder and resulting in higher risk premiums at a time when profitability is already facing downward pressure.”

Going forward Turkish banks could decide to scale back their lending to the rate of, or below, customer deposit growth, at 11% in the first half of 2015, says the rating agency. This compares with an average credit growth rate of 25% since 2010, which outpaced domestic savings growth averaging 16% of GDP in 2014.

Moody’s data shows that Turkish banks’ capital market borrowing more than doubled to USD152 billion at H1 2015 from USD66 billion at end 2010. Total lending by Turkish banks increased to USD540 billion from USD356 billion over the same period.

Most of the foreign-currency funding is short-term, which could result in higher costs of refinancing, says Moody’s, although banks have sufficient liquid assets to cover almost 100% of FX wholesale liabilities maturing until end-2016.

Foreign funding may become scarcer over the next 12 to 18 months as higher rates in the US will likely result in weaker flows of international funds into emerging markets such as Turkey.

Domestic and regional factors also weigh on investor sentiment. Turkish economic growth is likely to remain subdued: Moody’s forecast GDP growth of 3% in its Turkey Credit Opinion which was published in June.

Moreover, the Turkish lira has depreciated by 23% vis-à-vis the US$ since end-2014 due to the uncertain political climate ahead of repeat elections in November, rising geopolitical tensions and the expected Fed rate hike.

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